Manufacturing slumps in UK business confidence index

The manufacturing sector has seen a dramatic fall in confidence in the third quarter of 2017, according to the UK Credit Managers’ Index

The manufacturing sector has seen a dramatic fall in confidence in the third quarter, as Brexit talks stall and business organisations warn of increasing uncertainty across the UK.

Figures in the Q3 2017 UK Credit Managers’ Index (CMI), a quarterly barometer from the Chartered Institute of Credit Management (CICM), shows a 10.6-point fall in confidence for manufacturers from 64.0 to 53.4, despite a continually improving position in the previous two quarters.

The fall contributes to a Headline Index that is also in decline, settling 4.5 points down to 55.6, which includes a 1.4-point drop in Services. The positive impact of currency fluctuations on UK exports, seen as positive news in Q2, appears to have had only a temporary beneficial effect.

The Headline Index is also more pessimistic than the market; the FTSE All Share suggested an increase in business confidence, though the figures are far from convincing.

The CMI is important because it gauges nationwide levels of credit being sought and granted by credit professionals across the UK and acts as a primary indicator of actual levels of business being conducted. Certain ‘favourable’ and ‘unfavourable’ factors are measured to provide an overall view of confidence.

Perhaps most significantly, the ‘unfavourable’ factors (e.g. rejected credit applications, Days Sales Outstanding, overdues, disputes etc.) are all getting worse, with a particular lengthening in DSOs and overdues.

Philip King, Chief Executive of the CICM, says this is often the first sign of potential trouble: “When situations become tough, businesses hang on to their cash for longer, and that means the DSO and overdues figures will rise.”

Every single unfavourable factor experienced a decline, the overall index falling from 57.2 to 49.9 and below the critical 50.0-point threshold.

In Q2, King warned that confidence, and the economy, were still fragile at best. ‘Favourable’ factors witnessed a small improvement, rising from 66.8 to 68.8, and certain sectors, notably construction, also reported improving conditions.

Confidence within the regions suggest a clear divide: many regions in the west (including Wales) and the North (including Scotland) were in decline, with the exception of certain pockets of resistance, such as the North West and Northern Ireland; most regions within the East, and notably the East Midlands, the South East and London remain positive.

The CMI is a diffusion Index, producing scores of between one and 100 (typically in a range of 40 – 60). Ten equally weighted factors are included – three favourable and seven unfavourable and the Index is calculated on a simple average of the 10 factors.